On June 21, 2022, the United States Supreme Court agreed to hear a dispute involving split decisions among the circuit courts on non-willful penalties. The Fifth Circuit parted ways with the taxpayer friendly decision of the Ninth Circuit that non-willful penalties are capped at $10,000 per FBAR filing instead of the $10,000 per unreported bank account argued by the government. District courts in New Jersey, Connecticut, California, and Texas had all ruled in the taxpayer’s favor that non-willful penalties were capped at $10,000 per form as well.  The case headed to the Supreme Court is United States v. Bittner, where a taxpayer friendly decision from the District Court reduced the $2.7 million penalty to $50,000 based on a $10,000 per form cap on non-willful FBAR penalties.  The Fifth Circuit reversed the favorable district court decision and held that the “$10,000 penalty cap therefore applies on a per-account, not a per-form basis.”

About United States v. Bittner

Alexandru Bittner was a Romanian immigrant who naturalized in 1987, returned to Romania in 1990, and became a successful businessman and investor. Bittner maintained dozens of bank accounts in Romania, Switzerland, and Liechtenstein. Although Bittner had accountants maintaining compliance with Romanian tax laws he argued that he was unaware that as a U.S. citizen he still had to report his interests in certain foreign accounts and never filed FBARs while living in Romania. When he returned to the United States in 2011, he hired a CPA who filed corrected FBARs in 2012 but only listed his largest account and didn’t list his interest in 25 or more qualifying accounts. Bittner hired a new CPA in 2013 who filed corrected FBARs listing all foreign bank account information and balances. The accounts for each unreported year was in excess of 50 separate accounts.

Bittner argued that they committed only one non-willful violation, not multiple violations based on the number of accounts, and that the maximum penalty allowed by the statute was $10,000 for the failure to file the FBAR form each year. This is the same, successful, argument made to the Ninth Circuit in United States v. Boyd, 991 F.3d 1077 (9th Cir. 2021). The different results on the same argument leaves both the government and taxpayers confused about how to handle non-willful penalties going forward. The results for similar taxpayers should be the same, but currently isn’t. It is being reported that the government is respecting the Boyd decision only in the states that comprise the 9th Circuit (i.e. Alaska, Arizona, California, Guam, Hawaii, Idaho, Montana, Nevada, Northern Mariana Islands, Oregon, and Washington). This leaves taxpayers outside the reach of the 9th Circuit at a serious disadvantage.

Willful and Non-Willful Penalties

The government is allowed to impose a civil penalty on any person violating any provision of the Bank Secrecy Act pursuant to 31 U.S.C. §5321(a). There are two types of penalties depending on whether the violation was willful or non-willful. See 31 U.S.C. §5321(a). The maximums for the penalty are also different depending on whether the violation was non-willful (capped at $10,000) or willful (capped at the greater of $100,000 or 50% of the balance in the account at the time of the violation). Non-willful violations also contain a provision preventing penalties if the violation was “due to reasonable cause” and “the amount of the transaction or the balance in the account at the time of the transaction was properly reported.” The non-willful penalty does not explicitly prevent multiple violations, but it doesn’t authorize it either and that is where the dispute lies. Further complicating the issue is that the per-account analysis can lead to a clearly strange result. An admittedly non-willful taxpayer can pay a larger penalty than a willful violator merely because of the number of accounts involved.  This absurdity was raised in Bittner, but summarily dismissed by the Fifth Circuit as not absurd because of the government’s goal “to crack down on the use of foreign financial accounts to evade taxes.” However, the Fifth Circuit never addresses why a calculation system that can punish non-willful actions more severely than similar willful actions is not absurd or at least evidence that Congress deliberately left out the designation of number of accounts to prevent that result. At the Supreme Court, it appears several advocacy groups are entering an appearance as well.  These currently include the American College of Tax Counsel, Center for Taxpayer Rights and The Chamber of Commerce of the United States of America. Taxpayers currently assessed with non-willful FBAR penalties must weigh their options and their desire and ability to wait for further guidance against the benefits of a potentially favorable decision.

In some federal tax disputes, if at first you don’t succeed you may not get to try again. A recent Fifth Circuit decision confirms issue preclusion when the parties and the issue are truly the same. See ETC Sunoco Holdings, LLC v. United States, No. 21-10937 (5th Cir. June 8, 2022). Sunoco sought a refund in the Court of Federal Claims for tax years 2005 through 2008, arguing that they should be permitted a deduction of their costs of goods sold as an excise tax expense even though it did not technically reduce the company’s excise-tax liability. The Court of Federal Claims disagreed. See Sunoco, Inc. v. United States, 908 F.3d 710, 715 (Fed. Cir. 2018). Sunoco then sued again, five years later, for alleged overpayments from tax years 2010 and 2011 but filed suit in the Northern District of Texas instead. Jurisdiction in tax disputes can often be brought in the Federal District Court with local jurisdiction or the Court of Federal Claims that has national jurisdiction. Therefore, jurisdictionally, this was proper.  However, District Courts can choose not to hear the case if they conclude that the doctrine of issue preclusion applies. Continue Reading Fifth Circuit Says No Do-Overs in Oil and Gas Tax Dispute

Crypto currency tax, government make crypto investor to pay tax for capital gain or profit concept, businessman investor holding bitcoin surprised by government hand issue tax bill.Cryptocurrency holders often want to put their assets into an entity for a host of reasons, such as asset protection, arranging negotiated management rights and exit planning.  This post discusses basic federal income tax issues related to holding cryptocurrency inside a partnership (meaning any entity taxed under Subchapter K* of the Internal Revenue Code; the “Code’). Continue Reading Thoughts on Cryptocurrency and Tax Partnerships

Cryptocurrencies might, simplistically, be defined as virtual currencies that use cryptography to secure transactions which are digitally recorded on a widely distributed ledger.  The ledger technology uses independent digital systems to timestamp and harmonize transactions. The cryptocurrencies associated with a ledger are often called “coins” or “tokens”.

Cryptocurrency can be acquired in multiple ways.  This post covers only common methods, such as purchase, gift, or airdrop following a hard fork.  A hard fork occurs when a ledger is subject to modifications that “break” compatibility with an earlier protocol; in other words, each leg of the fork follows different “rules” so the blockchain ledger is split into an original chain and new chain. Hard forks sometimes result in the creation of a new cryptocurrency.  An airdrop is a method of distributing cryptocurrency units to the ledger addresses of individual taxpayers. Airdrops sometimes, but not always, follow hard forks. While blockchain technology is interesting, and an elementary understanding of its technological mechanics is useful, it is the tax consequences of the receipt and disposition of cryptocurrency which is the subject of this post. Continue Reading Cryptocurrency: The Basics of Tax Treatment and Recognition

Properly navigating the IRS labyrinth of rules and regulations is difficult and sometimes taxpayers fail to dot every “i” and cross every “t”. The results can sometimes be devastating for both individuals and small businesses. Especially if the IRS chooses to assess penalties for the unknown failures and then pay those penalties from other funds the taxpayer submits through its offset power. The recent case of Special Touch Home Care Services v. United States, provides an example of how this can sometimes occur. Continue Reading Taxpayer’s Informal Claim for Refund of Taxes Paid and Offset by the IRS Denied on a Technicality

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Dealing with the IRS can be a dangerous labyrinth for the untrained taxpayer or their non-tax advisors. In a recent Federal court case, E. John Rewwer, et al. v. United States, the taxpayers filed the wrong form claiming a refund and both the IRS and the DOJ Tax Division cried foul and tried to dismiss their case.  Fortunately, the court found that the taxpayer’s filing met the “informal refund claim” requirements and denied the government’s motion.

The taxpayers received an unfavorable audit determination increasing their tax liabilities for 2007, 2008 and 2009.  All amounts were paid and the taxpayers then filed IRS Form 843 (Claim for Refund and Request for Abatement) for all three years. The taxpayer’s attorney, not the taxpayers, signed the requests for refund but didn’t include IRS Form 2848 (Power of Attorney). The IRS allowed the 2008 claim but then denied the 2007 and 2009 claims, so the taxpayers appealed within the IRS.  A taxpayer generally has two years from the date of the determination to file a refund suit in federal district court.  The taxpayers didn’t hear from IRS Appeals, and the two years was expiring, so they filed their refund suit. Continue Reading Taxpayer Wins Tax Refund Despite IRS Claims That The Taxpayer Used The Wrong Form

Starting any business has risk, and most businesses take time to become profitable. Unfortunately, the IRS sees multiple years of losses from a business as a red-flag that usually results in further scrutiny. That scrutiny can result in disallowance of legitimate business losses and potential penalties for the underreporting. However, with the proper documentation and testimony, legitimate losses over multiple years can be taken and upheld. A recent Tax Court case on a miniature donkey businesses, Huff v. Comm’r, T.C. Memo 2021-140, outlines the factors needed to defend multiple years of losses in a business. Continue Reading Taxpayer’s Testimony on Businesses Losses Defeats IRS Arguments and Penalties

“The investigative work of 2021 has all the makings of a made for TV movie – embezzlement of funds from a nonprofit, a family fraud ring that stole millions in COVID-relief funds and a $1 billion Ponzi scheme used to buy sports teams and luxury vehicles. But this is real life and I’m grateful to our IRS-CI agents for pursuing these leads and ensuring that the perpetrators were prosecuted for their crimes,” said IRS-CI Chief Jim Lee.

The top 10 IRS-CI cases of 2021, as decided by the IRS-CI, include: Continue Reading IRS-Criminal Investigations Counts Down the Top 10 Cases of 2021

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